Tax Tip 2018-61, April 19, 2018
When a person sells an asset, the sale normally results in a capital gain or loss. There are several examples of assets people sell that can results in a gain or loss. These include:
- Property – including homes -- that someone inherits
- Property that someone owns for personal use or as an investment
- Investments, such as stocks and bonds
Determining a Gain or Loss
To determine a capital gain or loss on an asset, sellers must compute the difference between the basis, usually what they paid for the property, and what they received for it. Capital gains and losses are either long- or short-term, depending on how long the taxpayer holds the property. The gain or loss is short-term for taxpayers who hold it for one year or less.
Taxpayers whose capital losses are more than their capital gains can deduct the difference as losses on their tax returns, up to $3,000 per year, or $1,500 if married and filing a separate return. When their total net capital loss is more than the limit they can deduct, taxpayers can carry it over to next year’s tax return.
Capital loss deductions are applicable to the sale of investment property, but not on the sale of property held for personal use.
For Taxpayers whose long-term gains are more than their long-term losses, the difference between the two is a net long-term capital gain. If the net long-term capital gain is more than the net short-term capital loss, it’s a net capital gain.
The tax rate on a net capital gain usually depends on income. The maximum tax rate on a net capital gain is 20 percent, but for most taxpayers a zero percent or 15 percent rate will apply. In addition, capital gains may be subject to the net investment income tax of 3.8 percent when income is above certain amounts.
Forms to Use
- Form 8960, Net Investment Income Tax— Individuals, Estates, and Trusts
- Publication 544, Sales and Other Dispositions of Assets
- Publication 550, Investment Income and Expenses
- IRS Publication 551, Basis of Assets
- Schedule D instructions